The 3 Essential Things Needed in a Founders' Agreement

While your relationship with your co-founder may be peachy right now, there is a possibility it could turn sour down the road. To protect yourself (and the company), make sure these three areas are covered in your founders' agreement.

1. Roles and responsibilities. You are
going to want to make sure you have a clear understanding around
roles and responsibilities up front. Yes, it is critical
that a co-founding team collaborate and to create an open and
shared culture amongst themselves but that shouldn’t necessarily
mean everyone is in charge of everything. I have seen too
many startups make the mistake of thinking that every decision
has to be made collectively and every founder has control over
every decision. That will inevitably create confusion and
frustration.

I’m not saying you shouldn’t create an environment in which major
decisions are discussed and driven be a consensus. What I’m
saying that you should strive to establish some clear lines of
primary responsibility and enable a functional management system
that enables each of the co-founders to have clear
responsibilities and reporting obligations. Doing so will
go a long way in helping you minimize growing pains.
Remember, not every co-founder should be a co-CEO.

2. Equity ownership and vesting. You’ll
need to allocate the ownership of your new enterprise amongst the
founding team. While this is a subjective matter and can
sometimes be very delicate, it is imperative that you nail down
how you will split up the equity between the founding team
upfront to make sure there are no misunderstandings or hurt
feelings once things get off the ground.

Remember that you typically will have 90 percent to play with, as
you most likely want to set aside at least a 10 percent option
pool for future rank and file hires. Also remember there is
no rule that says all of the co-founders will have equal
ownership of the new enterprise -- and that’s where it gets a
little tough. You may have to tell your co-founders they
are not your co-equal. But it’s always better to have that
conversation on day one and not to move forward with a new
enterprise and then get stuck on who owns what.

Also, to stay on the theme of planning ahead, you need to
implement market vesting terms for all of the founders’ equity
(in case there is a split). What that means is that each of
the founders must earn their equity by contributing to building
value in the enterprise. The most common vesting terms are
those that occur monthly or quarterly over three or four
years. You do have some room to play with the parameters of
the founders’ vesting schedule, including the amounts that are
fully vested up front but you should stay within market
parameters.

Remember that you’re not doing this just because investors expect
it. You are doing it because you will create very
significant enterprise risk if one of the members of the founding
team picks up and leaves for the beach and you are forced to use
dilutive equity to bring on replacement talent, not to mention
you don’t want to create any incentives for a free ride.
So, be smart. Get the equity ownership conversation nailed
early and implement appropriate vesting terms up front.

3. IP assignment. When you and your
co-founders begin to iterate on an idea and develop a business
plan or begin to build a product or a platform, you are creating
intellectual property (IP). IP comes in many forms but make
sure that whatever IP is being developed for your new enterprise
belongs to the entity and not the individuals behind the
development of the IP. This concept extends to not only
your co-founders but all of your employees, consultants and
contractors.

Unfortunately, I have seen too many founders work, iterate and
develop an idea or a technology but separate before the IP that
has been developed has been assigned from them into the entity,
meaning your new enterprise may not have rights to various things
that it will need to evolve its business or otherwise raise
capital.

Getting IP assigned into the entity is simple and there are many
forms available online that get this basic assignment
accomplished. Do it on day one and don’t wait too
long.

Unfortunately, co-founding a business isn’t too dissimilar from
marriage. You can start with all the right intentions and
never imagine separating. But it does happen. Plan
ahead. Otherwise, you will jeopardize the viability of your
new enterprise.